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Resource-Rich Developing Countries
A thesis submitted to the School of Economics of the University of
East Anglia for the
Degree of Doctor of Philosophy
By:
May 2019
© This copy of the thesis has been supplied on condition that
anyone who consults it is understood to recognize
that its copyright rests with the author and that use of any
information derived there from must be in accordance
with current UK Copyright Law. In addition, any quotation or
extract must include full attribution.
i
Abstract
This thesis aims to investigate and study a variety of dimensions
of the relationship between FDI,
economic performance, the determinants of FDI, firm ownership and
firms’ efficiency in developing
host countries. To achieve the aim and to examine the arguments of
this thesis, the thesis’s structure
includes six chapters, including four empirical chapters. The first
empirical chapter attempts to find
an answer to the question whether FDI contributes positively to the
economic performance of the
destination country. This chapter also provides insights into how
the relationship of FDI’s depends
on other important aspects, such as the geographical location, the
nature of destination sector, the
technological distance between the source and the destination
countries. The second empirical
chapter takes a broader, regional perspective and studies the
determinants of the inflow of FDIs
towards GCC countries, with a specific attention to their
governments’ strategies to attract FDIs in
priority sectors and priority source country. Finally, the third
and the fourth empirical chapters turn
to efficiency analysis. Specifically, they discuss the role of
foreign-owned firms in promoting
efficiency amongst domestic firms, FDI inflows and controlling for
other selected key determinants:
composition of the labour force, the firm size and the firm age.
The analysis is performed for Dubai-
based firms in the manufacturing and construction in the third
empirical chapter, while the fourth
empirical chapter seeks to answer the same questions for the
financial sector.
ii
Acknowledgment
My appreciation and gratitude go primarily to my supervisors: Dr.
Emiliya Lazarova and Dr.
Corrado Di Maria for their continued support, guidance, motivation
and immense knowledge, from
the initial to the final stage of this thesis.
I am grateful to the Abu Dhabi Council for Economic Development and
to the Ministry of Education
– UAE for providing a full PhD scholarship. I would like to thank
H.E, Fahad Al-Raqbani for his
encouragement, trust and confidence.
I would also like to express my gratitude to the Dubai Statistics
Centre for granting me access to
such a unique, confidential dataset to find specific results in
this thesis.
I am appreciative to the academic staff and PhD students at the
School of Economics in the
University of East Anglia for their valuable feedback, comments and
advice during the internal
seminars, which helped me to improve my work in various
aspects.
I would like to attribute this thesis to my parents who have
cherished me throughout my PhD and
continuously supported me. Last but not least, special thanks to my
sisters, brothers and friends who
have always encouraged me to complete this thesis despite the
geographical distance between us.
iii
Contents
1.3 Thesis structure……………………………………………………………………………. 12
2 FDI, Economic Performance and Technological Spillover Effects:
Evidence from UAE
14
2.3 Conceptual
framework………………….…………..............................................................
27
2.4 Empirical specification……………………………………...……………………………... 29
2.7 Appendix to Chapter 2…………………….……………………………………….………. 40
3 Determinants of FDI Flows to the Gulf Countries: A Comparison of
Estimation
Techniques of a Panel Data Approach 45
3.1 Introduction………………………………………………………………………………… 45
3.3 Conceptual framework ………………………………………………………..…………... 55
3.3.1 Empirical evidence on determinants of FDIs ……………………….…………....
56
3.3.2 Empirical evidence on zero trade flows and the estimation
models……………… 60
3.4 Empirical specification………………………...…………………………………………... 65
3.7 Appendix to Chapter 3…………………….………………………………………………. 78
4 Foreign Ownership and Firms’ Efficiency: A Two-Stage Analysis of
Dubai’s
Manufacturing and Construction Sectors 83
4.1 Introduction………………………………………………………………………………… 84
4.3 Conceptual framework…………………………………………………………….………. 91
4.3.2 The second-stage (DEA GLS estimator) …….……………...…………………….
95
4.4 Empirical specification…………………………………………………………………….. 96
4.7 Appendix to Chapter 4…..……………….…………………..…...………………….…..…
105
5 An Analysis of Dubai’s Banking Sector Performance: Are Foreign
Banks More Efficient
than Domestic Banks? 108
5.1 Introduction………………...…………….……………...…...………………….……….… 108
5.2 UAE banking sector and the structure of the Dubai banking
system………………...……. 112
5.3 Conceptual framework…..…………….……………………..…...………………….…..…
114
5.3.2 The second-stage…..…….…………………...……..…...………………….…..…
116
5.4 Empirical specification…..…….…………………...………..…...………………….…..…
116
v
6.2 Further research……….….………..……...………………...…..…...………………….….
134
2.3 Value added and FDI…………………………….………………………….………...…… 41
2.4 Value added, FDI and distance…………………………………….……………….……… 42
2.5 Value added, FDI, distance and geographical
spillover…………………………………… 43
2.6 Value added, FDI, distance and sectoral
spillover………………………….……………… 44
3.1 Variables’ definitions and expected
signs………………………….……………….………78
3.2 Descriptive statistics………………………………………………….…………….……… 69
3.3 Heckman estimation results…………………………………………….…………….….… 80
3.4 OLS estimation results………………………………………………….……………...… 81
3.5 PPML estimation results………………………………………………….…………….. 82
4.1 Input and output variables for measuring efficiency in the
first-stage from existing literature
………………………………………………….…………………………………….……. 97
4.3 Manufacturing sector - descriptive
statistics…………………………….………………….98
4.4 Construction sector - descriptive
statistics………………………...…….…………………. 99
4.5 Descriptive statistic for efficiency using
DEA…………………………….…….………… 100
4.6 Yearly descriptive statistic for efficiency using DEA and
summary of average efficiency and
inefficiency scores…………………………………………………….…….…………...… 101
4.7 Variables’ definitions and expected signs
………………………………………....…….…105
4.8 Firms’ factors and determinants of VRS efficiency scores, using
a bootstrap GLS regression
for manufacturing and construction
firms………………………….……………....…….…106
4.9 Firms’ factors and determinants of CRS efficiency scores, using
a bootstrap GLS regression for
manufacturing and construction firms………………………….…………….........…….…
107
5.1 Descriptive statistics…………………………………………………….…….…………….118
vii
5.3 Two-sample t-test with equal variances for inputs and outputs
variables.....……………… 119
5.4 Simar-Wilson double bootstrap model in a two-stage DEA
VRS…….………………….... 128
5.5 GLS bootstrap model in a two-stage MPI VRS.…………………………………………....
129
5.6 Simar-Wilson double bootstrap model in a two-stage DEA
CRS…….………………….... 130
viii
List of Figures:
1.1 FDI inflow to the world countries in billion USD
………………………………………. 2
1.2 FDI inflow as a share of GDP……………………………………………………………… 3
1.3 FDI inflow as a share of GFCF……………………………………………………………. 3
1.4 GCC's GDP in billion USD ………………………………………………………………. 4
1.5 GCC's FDI in billion USD ………………………………………………………………... 5
1.6 GDP, GFCF and GDP per capita in USD…………………………………………………. 7
2.1 FDI in million USD………………………………………………………………………... 22
2.2 FDI by year and sector in million USD…………………………………………………….
23
2.3 FDI by year and source country in million
USD…………………………........................... 24
2.4 Number of FDI projects by year and source
country………………………………………. 25
2.5 FDI by year and destination emirate in million
USD……………………………………… 26
2.6 Main sectors represent FDI between the period 2006 and
2014…………………………… 26
3.1 FDI in million USD………………………………………………………………………... 49
3.2: FDI inflow as a share of GDP……………………………………………………………….49
3.3 FDI by year and sector in million USD…………………………………………………….
50
3.4 FDI by year and source country in million
USD…………………………........................... 52
3.5 Number of FDI projects by year and source
country………………………………………. 54
4.1 Manufacturing and construction sectors contribution to GDP in
Dubai (In constant price). 90
4.2 Share of manufacturing and construction sectors workforce in
Dubai's total workforce….. 91
4.3 Percentage contribution of manufacturing and construction
sectors of total FDIs in Dubai's.
…………………………………………………………………………………………...… 91
5.1 Mean of efficiency scores by returns to scales assumption, bank
ownership and year……. 121
5.2 MPI average efficiency change scores – input-oriented VRS
model……………………… 122
ix
DEA Data Envelopment Analysis
DMU Decision Making Unit
FDI Foreign Direct Investment
GCC Gulf Co-operation Council (member countries: Bahrain, Kuwait,
Oman, Qatar, Saudi
Arabia and the UAE)
GDP Gross Domestic Product
GLS Generalized Least Square
MPI Malmquist Productivity Index
OFDI Outward Foreign Direct Investment
OLS Ordinary Least Square
QAR Qatar Riyal
SAR Saudi Arabia Riyal
TFP Total Factor Productivity
UAE United Arab Emirates
USD United States Dollar
1
The world economy has become increasingly integrated, and foreign
capital globalisation,
particularly Foreign Direct Investment (FDI) flow, which is a
particularly significant driving force
behind the interdependence of national economies, has also
increased significantly in developing
countries, due to the fact that FDI is the most stable and
prevalent component of foreign capital
inflows (Adams, 2009). FDI, it has been argued, plays a significant
role in creating positive
externalities in economic growth by providing financial resources,
creating jobs, transferring
technological know-how, accessing new management and organisational
skills, boosting exports and
enhancing competitiveness (Kobrin, 2005; Adams, 2009).
FDI plays a crucial role in economic growth in developing countries
by generating benefits for the
host economies and solving their short-term capital deficiency
problems. FDI stimulates the target
country’s economic development, creates a more conducive
environment for the foreign investor
and benefits domestic industries. FDI facilitates resource
transfer, exchanges of knowledge, transfer
of technologies and spillovers towards domestic firms. It also
helps to make them more competitive
in both national and international markets. FDI brings positive
externalities to the economy, such as
training and labour management opportunities. These may then be
made generally available in the
economy, and lead to a further increase in the standards of
productivity and efficiency. FDI creates
new jobs, as the foreign investors build new firms and companies in
the target country, creating new
opportunities. This leads to an increase in income and provides
purchasing power for the people,
which in turn leads to an economic boost. The United Nations
Conference on Trade and
Development (UNCTAD) (2008) reports that the facilities and
equipment provided by foreign
investors through FDI inflows have the potential to create
employment, increase the workforce’s
2
productivity and develop human capital resources. The attributes
gained by training and sharing
experiences would increase the education and overall human capital
of a country. FDI contributes
to national income and wellbeing, with more jobs, higher wages and
improved working conditions.
As a result, economic growth is spurred. FDI is seen as the largest
source of external financing for
developing countries. Capital inflows from FDIs can help to finance
the deficit in the host developing
country, but not all host developing countries are attracting FDIs
to fill this gap in their economics
as they might need other benefits of FDIs such as the rich
developing countries which hope to benefit
from FDIs' knowledge and technologies.
According to UNCTAD (2018), the annual amount of FDI inflows
globally in 2006 was USD 1.4
trillion, while it increased to reach USD 1.9 trillion in 2017.
Moreover, in 2006 FDI inflows
accounted for only 2.1% of world Gross Domestic Product (GDP),
while in 2017 this had increased
to close to 2.5%. FDI inflows as a percentage of Gross Fixed
Capital Formation (GFCF) equalled
9.3% in 2006, while they increased to approximately 11.1% in 2017.
Figure 1.1 shows that
developed countries still account for the largest share of FDI
inflows, although FDI into developing
countries has continuously increased for the period from 2006 to
2017.
Figure 1.1: FDI inflow to the world countries in billion USD
Figure 1.2 and Figure 1.3 generally show that FDI inflows have
become increasingly important as a
source of economic growth and investment in the world’s economies.
Given its volume, FDI can be
seen as an important source of financial liquidity and a
significant determinant of the future growth
rate of an economy.
2015 2014 2007
2013 2011 2012 2010 2009 2008 2006 2016 2017
3
Figure 1.2: FDI inflow as a share of GDP
By looking at FDI as a share of GDP and GFCF and comparing it
across developed and developing
countries, Figures 1.2 and 1.3 above indicate that the significance
of FDI has increased in both
groups of countries. However, the fact is that the FDI ratios of
developing countries as a share of
GDP and GFCF are slightly close to those of developed countries in
some years. This fact points to
the importance of FDI inflow in developing countries as, in spite
of the fact that they receive a far
smaller amount of FDI than the developed economies, it represents a
bigger share of their GDP. The
large increase in the volume of FDI and the share of FDI offer a
strong motivation to research this
phenomenon.
1.9%
2.9%
3.5%
2.1%
1.9%
1.9%
1.8% 2.0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2017
Developed countries Developing countries
8.3% 6.9%
13.9% 13.1%
7.1% 7.8% 8.4% 7.8% 6.3% 7.1% 6.4% 5.9% 5.7% 5.8% 5.9% 6.0%
7.2%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2017
Developed countries Developing countries
Figure 1.3: FDI inflow as a share of GFCF
4
The Gulf Co-operation Council (GCC) countries are considered to be
one of the most important
developing regions in the world; the region has a stable economy
due to world oil and gas supplies
and this facilitates great wealth from oil and gas exports. The
largest three countries as measured by
GDP, according to the World Bank, are the Kingdom of Saudi Arabia
(KSA), the United Arab
Emirates (UAE) and Qatar.
Data source: The World Bank
Figure 1.4 shows the sizes of the economies in the GCC. In 2017,
KSA represented 46% of the total
GDP from GCC countries, UAE occupied the second place with 26%, and
finally Qatar represented
11.4%. These three countries have the largest GDP in the GCC and
together they represented
approximately 83.4% in the mentioned year due to their richness in
natural resources and the
contribution of the non-oil sector, which has strengthened and
fortified economic growth.
These three countries are also considered to be the main countries
in terms of FDI inflows, compared
with other GCC countries. According to fDi Intelligence (2018), in
2017 these three countries
received 89.3% of the total FDI inflows into GCC countries.
266.6
287.7
307.7
321.2
335.5
373.1
384.2
387.3
524.7
577.0
608.1
624.2
646.9
678.7
690.1
684.2
125.1
167.7
186.8
198.7
206.2
200.1
170.7
169.8
115.4
154
174
174.1
162.6
138.0
142.9
138.8
58.6
68
76.6
78.7
81
71.2
74.8
74.1
25.7
29
30.7
32.5
33.3
30.8
31.8
33.1
2010
2011
2012
2013
2014
2015
2016
2017
5
Data source: fDi Intelligence
In 2017, the UAE received the highest FDI inflows with 53.4% of the
total FDI inflow into GCC
countries, followed by the KSA with 31.4% and then Qatar with 4.5%.
The UAE, KSA and Qatar
maintained their position as an investment hub, not only for
developing countries but also for
developed ones. While FDI in these three destinations continues to
grow, the governments offer an
effective and supportive legal framework for businesses and
investments; in order to achieve the
goal of making their countries more attractive to FDI. This thesis
focuses on these three countries.
Geographically, UAE covers 83,600 square kilometres with a total
population of 9.5 million in 2018.
The UAE is located in the Southeast of the Arabian Peninsula,
between the KSA and Oman,
bordering the Gulf of Oman and the Arabian Gulf. In December 1971,
the UAE was established and
became a federation of six emirates – Abu Dhabi, Dubai, Sharjah,
Ajman, Umm Al-Quwain and
Fujairah, and successively, in 1972, Ras Al Khaimah joined the
federation country as the seventh
emirate. The capital of the UAE is Abu Dhabi, which is the largest
and wealthiest emirate.
KSA occupies most of the Arabian Peninsula, from the Red Sea and
the Gulf of Aqaba to the west
and the Arabian Gulf to the east. It is the 14th largest country in
the world, covering around two
million square kilometres. Neighbouring countries are Jordan, Iraq,
Kuwait, Qatar, UAE, Oman,
Yemen and Bahrain (connected to the Saudi mainland by a bridge).
KSA contains the world's largest
continuous sand desert, called “The Empty Quarter” (Rub Al-Khali).
Formerly, the area of KSA
contained four main distinct regions: Hejaz, Najd, and parts of
Eastern Arabia (Al-Ahsa)
and Southern Arabia ('Asir). The KSA was founded in 1932 by Ibn
Saud and the capital is Riyadh,
which is the largest city in the Kingdom.
The State of Qatar is an independent emirate in the Gulf region.
Doha city is the capital city of Qatar.
Qatar is situated on a peninsula that extends from the Arabian
Peninsula north into the Arabian Gulf.
10.2
10
7.9
7.2
12.9
13.8
14
14.1
8.3
15.7
7.8
6.3
9.9
8.1
7.4
8.3
4.1
3
2
1.5
1.2
2.1
1.3
1.2
0.2
0.1
0.1
0.5
1.1
0.9
0.8
1
1.2
1
1
1
1.1
0.9
0.8
0.9
1.3
1
1
1
1.0
0.9
0.9
0.9
2010
2011
2012
2013
2014
2015
2016
2017
Its sole land border is with KSA. Qatar shares maritime borders
with Bahrain, Iran, and the UAE.
The country covers an area of 11,586 square kilometres. Qatar
gained independence in 1971 having
been under a British protectorate in the early 20th century. The
country has been ruled by the House
of Thani since the early 19th century.
Economically, these three GCC countries rely heavily on natural
resources, namely crude oil and
natural gas, which are considered as the main drivers of their
economies. The UAE has developed
rapidly and it is considered to be one of the wealthiest countries
in the world. According to OPEC
(2014), UAE has 8.1% of the world’s crude oil reserves and controls
the sixth largest proven natural
gas reserve. The UAE has an open economy with a high GDP per capita
and a sizeable annual trade
surplus. UAE’s GDP per capita reached USD 41,699.1 in 2017, while
total GDP totalled USD 387.3
billion and the real GDP growth rate was 4.3%. GFCF was USD 90.9
billion in 2017. Successful
efforts at economic diversification have reduced the portion of GDP
from the oil and gas sector to
30% in the country. The UAE’s strategic plan is to develop the
country as a global trade and tourism
hub, develop manufacturing, and create more job opportunities for
UAE nationals through improved
education and increased private sector employment.
KSA has an oil-based economy with strong government controls over
major economic activities. It
possesses about 18% of the world's proven petroleum reserves, ranks
as the largest exporter of
petroleum, and plays a leading role in OPEC. The oil and gas sector
accounts for about 40% of GDP,
recorded at a total of USD 684.2 billion in 2017, when levels of
GFCF were USD 90.9 billion.
Despite possessing the largest petroleum reserves in the world and
being considered one of the
richest countries, the GDP per capita was ‘only’ USD 25,001 in
2017, mostly due to the large
population of approximately 33 million, and the weak oil prices in
that year, which affect domestic
production in the KSA.
Qatar is one of the smallest countries in the GCC region. However,
what the country lacks in size,
it makes up with wealth in natural resources. Almost 14% of total
world natural gas reserves are
found in Qatar (approximately 25 trillion cubic metres), the third
largest after Russia and Iran. It is
also the largest supplier of liquefied natural gas. This wealth of
natural resource translates into a
GDP of USD 169.8 billion and GFCF levels of USD 69.3 billion in
2017. Qatar has a small
population estimated at about 2.6 million. Consequently, its GDP
per capita of USD 63,249 was the
highest, not only in the GCC region, but also in the whole world,
in 2017.
Data source: fDi Intelligence, Federal Competitiveness and
Statistics Authority-UAE, General Authority for Statistics –KSA,
Ministry of Development Planning and Statistics-Qatar, World
Bank
8
Politically, the governments are eager to devise strategies for
economic diversification, by seeking
to promote the development of the private sector as a complement to
oil and gas, especially with
declining oil prices. The dependence on oil and gas may stall
economic development as there is a
possibility of depletion of the natural resources in the long run.
Moreover, these three GCC countries
would worry about the Dutch Disease. Economically, the Dutch
disease is the apparent causal
relationship between the increase in the economic development of a
specific sector such as natural
resources and a decline in other sectors which that lead to the
substantial appreciation of the domestic
currency. However, since the discovery of oil, these three GCC
countries have worked to diversify
its economies and develop development programs that strengthen its
economic base on the
establishment of investment funds that support the private sector
in all areas and sectors such as:
health, industrial, agricultural and real estate. There was no
retroactive effect on the local currency
of the GCC countries, because the they pursue a policy of fixed
rate its local currency by pegging it
to the US dollar (the world's most powerful economy), keeping its
currency at an acceptable level
that serves its domestic and foreign interests. As a result,
imported goods have generally become
more expensive than domestic commodities as a result of continued
government support to the
private sector to keep competition and encourage new businessmen
and projects to enter different
industries and sectors.
Furthermore, one of the key steps that these governments have taken
in terms of economic
diversification is to attract foreign investments. UAE is reported
to have political and economic
stability, rapid GDP growth, fast-growing capital markets, swift
population growth and an absence
of corruption, all positive factors contributing to the UAE’s
attractiveness to foreign investors. The
UAE ranked twelfth out of 143 economies in the world, according to
the Global Competitiveness
Report issued by the World Economic Forum in 2017. The report’s
mandates are to identify different
pillars of a country such as institutions, infrastructure,
macroeconomic environment and labour
market efficiency. It assesses the competitive landscape of the
country. According to the World Bank
(2017), UAE was 11th out of 189 countries in ease of doing business
in 2017, and according to
the Global Investment Report - 2017 published by UNCTAD, the UAE
ranked as the second largest
FDI recipient in the West Asia region, after Turkey. The UAE
attracted FDI inflows of USD 14.1
billion in 2017, according to fDi Intelligence (2018).
KSA seeks to sustain the current development boom through a
development strategy in which
foreign investment plays a significant role. In recent years, KSA
has seen major, rapid, successive
and consecutive economic and institutional developments and
reforms, paving the way for the
Kingdom's membership of the World Trade Organization (WTO). The KSA
is ranked as one of the
top five home economies for FDI recipients in the West Asia region,
according to the Global
Investment Report - 2017 published by UNCTAD. KSA was ranked 92nd
in Ease of Doing Business
according to fDi Intelligence. In addition, according to the Global
Competitiveness Report issued
by the World Economic Forum in 2017, KSA is ranked 25th out of 140
economies in the world.
Qatar is ranked as one of the top five economies in terms of FDI
receipts in the West Asia region,
according to the Global Investment Report - 2017 published by
UNCTAD. It is ranked number 4
after Turkey, the UAE and KSA. Qatar ranked 83 in Ease of Doing
Business 2017 published by the
World Bank while it attracted FDI inflows of USD 1.2 billion in
2017, according to fDi Intelligence.
Qatar’s economic freedom score is 71.2 and it was ranked 28th in
the 2017 Index of Economic
Freedom. In June 2014, an embargo of a full land, sea and air
blockade on Qatar was introduced by
four countries: KSA, UAE, Bahrain and Egypt as Qatar has violated a
2014 agreement with the
members of the GCC. Since then, economists expected a decrease in
Qatar's economy.
The above mentioned details indicate the desire of these three
countries to stabilise the growth and
development of their economies away from dependence on the oil and
gas sector. With this aim in
mind they have turned to economic diversification and attracting
FDI.
Legally and in terms of FDI laws, regulations and incentives in
these destinations, UAE is upgrading
several major legislations in investment law; this helps to remove
a large part of the regulatory and
administrative obstacles and to attract more FDI. It also creates a
unified regulatory framework for
foreign investment in terms of regulating investment procedures,
licensing and registration. The law
deals with advantages, tax exemptions, guarantees for foreign
investors, and ownerships. 100%
foreign ownership has been allowed since 2010. In KSA, a number of
incentives and facilities for
FDI have been delivered such as reducing the tax levied on foreign
investors from 45% to 20%. The
Saudi Industrial Development Fund (SIDF) allows the extension of
loans to foreign investors. By
2016, KSA had updated the FDI law by allowing 100% ownership for
foreign investors in the
wholesale and retail trade sector only. In Qatar, foreign
investments are generally limited to 49% of
the capital for most business activities, with a national Qatari
partner(s) holding at least 51%.
Nevertheless, Qatar has continued to modify and amend the
investment law in recent years. The new
law allows foreign investors to hold 100% ownership in certain
sectors that have been selected by
the government, including agriculture, health, manufacturing,
communication, tourism, real estate,
education, finance, electricity and gas, and other service sectors.
The Qatar government offers a
variety of incentives for foreign investors such as tax exemptions,
energy subsidies and low-cost
financing.
Based on the above overview, generally, we would like to examine
the role of FDI on economic
performance by focusing on rich developing countries. The
relationship between FDI and economic
performance has largely been explored empirically. Several studies
reveal that FDI brings with it
vehicles for technology transfer, and promotes competition, product
diversity, spillovers and
management techniques, which could be adapted by the host country
(Wang and Blomstrom, 1992;
Sjoholm, 1999; Moura and Forte 2013). However, there is ambiguity
in the literature on the role of
FDI in economic performance. Some studies find positive
relationships between FDI and economic
growth (Borensztein, De Gregorio, and Lee, 1998; Woo, 2009) while
other researchers find negative
and ambiguous relationships (Aitken and Harrison, 1999; Alfaro et
al., 2004). Therefore, it is
important to study FDI inflow in a certain country in order to
clarify its contribution to the host
country’s economic performance. This is especially true for FDI
inflows into rich developing
countries that have not yet been studied at a detailed sectoral
level and not only looking deeper into
the relationship between FDIs and economic performance as a capital
and financial liquidity but also
look at the spillovers affects from FDI inflows.
Furthermore, some determinants of FDI have been examined in various
studies empirically, as well
as their related on FDIs. To attract FDIs, host countries seek to
understand which main pull factors
and determinants of FDI are key for foreign investors to be
attracted and to enhance the FDI inflows
(Chakrabarti, 2001; Banga, 2003). Thus, it is important to identify
the importance of each offered
determinant of FDI and its relationship with FDI inflow in a host
country, particularly for rich
developing host countries located in the same region that need to
illustrate the variations accurately.
Moreover, the idea of foreign firms’ entry and their association
with firms’ efficiency have been
studied in a growing literature. Studies indicate the potential
benefits of FDI inflows whereby foreign
firms that are characterised as more efficient are viewed as
important drivers in increasing the
productivity and competitiveness of domestic firms (Jemric and
Vujcic, 2002; Bottasso and
Sembenelli 2004; Suyanto and Salim, 2011; Khalifah, 2013). The two
mechanisms identified in the
literature are the introduction and adoption of technologically
superior techniques and the spread of
strong management capabilities. On the other hand, a number of
studies find that domestic firms are
more efficient than foreign-owned firms (DeYoung and Nolle, 1996;
Claessens et al., 2001; Isik and
Hassan, 2002; and Ong et al., 2011). Hence, it is importatnt to
study the efficiency of foreign firms
and FDI inflows in order to clarify the effectiveness of firms and
sectors in a host country.
Thus, it is interesting to see how FDI contributes to a host
country’s economic growth in different
aspects. The main purpose of this thesis is to examine empirically
the implications of the role of FDI
in rich developing countries. Firstly, it examines the relationship
between FDI and economic
performance in a rich developing country. Secondly, in order to
attract FDIs into any host country,
the country needs to know the determinants of FDI, so this thesis
aims to identify the importance of
the determinants of FDI and their relationships on FDI inflows.
Then, it will assess whether foreign
firms are actually most efficient, by looking at firms’ ownership
and firms’ efficiency in a host
11
country in different economic sectors. There are some unique
contributions in this thesis; the first is
studying rich developing countries’ FDI inflows. The most
comprehensive is that it studies 14
economic sectors. It is the first study to use a recent and
confidential dataset. There are distinctive
features in the research questions that have not been considered
yet in previous studies. The choice
of this topic provides the opportunity to find results that may
help governments and policymakers
of host countries make suitable decisions.
1.2 Methodology and research questions
The methodology of this thesis is empirical. Different econometric
models have been chosen to study
different aspects of FDI. The dataset is collected from
international organizations and governmental
entities such as fDi Intelligence, the World Bank, the Federal
Competitiveness and Statistics
Authority in UAE, the Statistics Centre in Abu Dhabi, the Dubai
Statistics Center, the Ministry of
Development Planning and Statistics in Qatar, the General Authority
for Statistics in KSA, and the
Ministry of Finance in UAE, KSA and Qatar. In all studies in this
thesis a panel data set is employed.
The first empirical chapter (Chapter 2) attempts to find an answer
to these questions: (a) does FDI
contribute positively related with economic performance in the
UAE’s emirates? and (b) how does
FDI’s related vary by sector? and (c) how does the geographical and
sectoral extent relate FDI
technology spillover and the associated spatial diffusion in the
UAE, as a host country of FDI?. To
investigate these questions, we will use detailed sectoral level
panel data from three groups of
emirates in the UAE over the period 2006-2014 and use Solow’s
growth accounting technique by
employing production functions.
Based on the results of Chapter 2, if the FDI inflows have a
significant positive or insignificant
related with economic performance in the UAE, and if this
relationship depends on FDI and how
distant in technological sense the FDI source is, then the question
raised is: what are the most
important determinants of FDI that a host country has control over
to increase and enhance its
attractiveness to FDIs? This is investigated empirically in the
following chapter (Chapter3).
The second empirical chapter (Chapter 3) employs a country sectoral
panel dataset for three rich
countries from the GCC: UAE, KSA and Qatar. Our particular focus
will be on investigating and
assessing these questions: (a) what are the important determinants
of FDI inflows? and (b) has
GCC’s strategic plan been effective? This will be determined by
looking at the strategic plan and
identifying priority sectors for FDI and priority source countries.
The period under investigation is
2006-2014 and each economy is broken down into 14 economic sectors,
into which FDI flows from
66 source countries worldwide. To answer the research questions, a
gravity model is employed.
12
Based on the results of Chapter 3, if the selected determinants of
FDI have a significant relationship
with FDI inflows and if we find the main priority sectors to
attract FDIs, then the question raised is:
are foreign firms more efficient than their domestic counterparts?
This will be investigated
empirically in the last two empirical chapters (Chapter 4 and 5),
which consider different firms’
sectors and methodologies, focusing on the efficiency distance
between foreign-owned and domestic
firms in a number of priority sectors.
Therefore, the third empirical chapter (Chapter 4) attempts to find
an answer to these two questions:
(a) are foreign-owned firms in the manufacturing and construction
sectors more efficient than their
domestic counterparts in Dubai? and (b) do FDI inflows and other
selected key determinants
(composition of the labour force, firm size and age) affect
efficiency? To answer these questions,
we will use a distinct confidential dataset of firm-level panel
data from the Annual Economic Survey
from the period 2014-2016. Empirically, we will use Data
Envelopment Analysis (DEA) input-
oriented Constant Returns to Scale (CRS) and Variable Returns to
Scale (VRS) in the first stage to
measure firms’ efficiency scores and in the second stage we will
study the relationship between
efficiency and firm ownership, FDI inflow, the composition of the
labour force, firm size and firm
age.
The last chapter (Chapter 5) seeks to answer the same set of
questions with respect to the financial
sector in Dubai. The banking sector in Dubai is considered the main
tertiary sector, as well as being
one of the most important development sectors in Dubai’s strategy.
Dubai has established itself as a
financial hub for the Middle East and the centre of its
international financial market. We will use a
distinct confidential dataset of bank-level panel data from the
Annual Financial Survey from the
period 2013-2016 in Dubai by employing DEA and the Malmquist
Productivity Index (MPI) input-
oriented VRS model in the first stage to measure banks’ efficiency
scores. In the second stage we
will we adopt the DEA double bootstrap of Simar-Wilson’s model and
MPI bootstrap Generalised
Least Square (GLS) regression to determine the relationships of
bank ownership, FDI inflow, skilled
labour, bank size and bank age on banks’ efficiency.
1.3 Thesis structure
The main purpose of this thesis is to examine empirically the
implications of the role of FDI in rich
developing countries. To achieve our aim and to examine the
questions and the arguments in this
thesis, it has been designed to include six chapters. The following
chapter is our first empirical
chapter (Chapter 2), titled “FDI, Economic Performance and
Technological Spillover Effects:
Evidence from UAE”. This is followed by the second empirical
chapter (Chapter 3), titled
“Determinants of FDI Flows to the Gulf Countries: A Comparison of
Estimation Techniques of a
13
Panel Data Approach”. Our third empirical chapter (Chapter 4)
follows, titled “Foreign Ownership
and Firms’ Efficiency: a Two-Stage Analysis of Dubai’s
Manufacturing and Construction Sectors”.
Our last empirical chapter (Chapter5) is titled “An Analysis of
Dubai’s Banking Sector Performance:
Are Foreign Banks More Efficient than Domestic Banks?” The last
chapter is the Conclusion.
14
from UAE
Abstract: This study is an attempt to empirically examine the
relationship between FDI and
economic performance and investigate the geographical and sectoral
spillover effects from the FDI
inflows into the UAE. Using a detailed sectoral-level panel dataset
covering the period 2006 – 2014
and computing the Total Factor Productivity (TFP) using growth
accounting framework. The main
empirical finding indicates that FDI has a mixed relationship with
economic performance in the
UAE and this relate depends on sectoral and geographical
characteristics of the destinations. Our
results further show that FDI from more technologically advanced
countries tends to have a positive
relationship with economic activity. The findings suggest that FDI
inflows from countries with far
distance of UAE seem to bring high benefit quality of
technology.
2.1 Introduction
Today's world is witnessing a sizable volume of FDIs flowing into
different countries. In 2005, the
global FDI flow was around USD 1 trillion and in 2015 it reached
USD 1.9 trillion, according to the
UNCTAD World Investment Report 2016. Due to these massive inflows,
much attention has been
given to the relationship between FDI and economies.
15
As one of the characteristics of the modern globalised economy, FDI
is becoming an important
element of the strategic vision for the development of any national
economy. In particular, its
development importance is further emphasised in the case of
developing countries in transition,
whereas the practice shows that among these countries the
fastest-growing ones are those that receive
the highest quantum of FDI inflows. FDI inflows have been regarded
as having a beneficial
relationship with developing host countries, since FDI drives
reform, improves quality of life and
ultimately brings prosperity (Wang and Blomstrom, 1992; Borensztein
et al., 1998; Bengoa et al.,
2003; Wang et al., 2010). FDI has been suggested to be beneficial
for the host country at different
levels. It creates a flow of capital across borders. It can spread
best practices in corporate governance
of management. It allows transfer of technology and know-how as
well as promoting competition in
the domestic market along with the domestic firms’ development and
reorganization (Moura and
Forte, 2009). The FDI host country will gain through employee
training while operating the new
businesses, which will eventually contribute to the development of
the human capital, raise
productivity and enhance the host country’s economic
performance.
This study studies the relationships between FDI and economic
performance and illustrates that
FDI’s impact varies by sector. It also investigates the presence of
geographical and sectoral spillover
effects of FDI, using the UAE as a case study. The UAE is an
interesting case study because it is
one of the rich developing countries that pursues an active policy
to attract FDIs. The goal of this
policy is to push forward and develop the UAE’s investment climate.
It must be stressed that the
primary role of FDI is not to bring in capital but to bring in
know-how and enhance productivity. In
our analysis we take a sectoral approach and investigate what type
of FDIs by origin and sectoral
destination are most beneficial to the UAE’s economy. We carry out
an empirical examination of
the relationship between the inflows of FDI and sectoral-level
economic performance in the UAE.
We extend standard analyses by controlling for the technological
distance between the source of FDI
and the recipient, which is done by weighting the source
composition of FDI. We further study FDI
spillovers along geographical and sectoral dimensions as channels
of technological diffusion. We
use a detailed FDI dataset that contains information on both the
origin and the destination of FDI by
each emirate and on 14 economic sectors in the UAE over the period
of 2006-2014. To answer our
questions, we calculate the TFP and employ an accounting model that
has been applied to many
countries and long been identified by several economists (Solow,
1956 and 1957; Abromovitz, 1956;
Denison, 1962). To the best of our knowledge, this is the first
study about FDI distance to frontier
that uses a sectoral-level weight to distance index and FDI
distance to frontier in order to explain the
UAE’s economic performance and technology spillovers from FDI
inflows. Our empirical study
finds that FDI has different relationship on economic performance,
depending on the destination
location. Attracting FDI inflows from source countries that are at
a far distance brings higher quality
technology to the UAE. The sectoral spillover effects of FDI are
highest in the primary type sector
16
(which consists of one sector; mining and quarrying), as the
primary sector affects the value added
of the UAE more than other sectors.
There is a long-standing opinion among economists and policymakers
that FDI is a greater
contributor to long-term growth and development than any other form
of capital inflow. The direct
capital financing that it provides suggests that FDI can play an
important role in modernising a
national economy and promoting economic development. Moreover,
economists have also reported
on the role of FDI in upgrading the host country’s economy through
its relation. FDI inflows have
direct physical and human capital relationships on a host country’s
outcome. Direct effects and
relationship are reflected in employment and capital formation.
This creates a flow of capital
financing across borders, FDI is conceived as an addition to the
capital stock of the recipient
economy (Brems, 1970) and an important source element to boost and
augment human capital
(Bengoa et al., 2003).
On the other hand, there are indirect effects and related of FDIs,
concerned with the diffusion of
knowledge, which is more of a qualitative aspect. FDI brings in
advanced technology and captures
all the transfer from the multinational companies to the host
country. This includes technology,
know-how, and new management techniques as technological spillovers
into a host economy; this
improves labour qualification and increases the value-added
content. The potential of FDI
technological spillovers is the positive externality of FDI that
host countries hope to benefit from
(Johnson, 2005). The greatest relationship of FDI is that of
technological spillovers, which occur
when the advanced technology from FDI is able to trickle down to
the entire economy. FDI induces
more spillovers when the host country develops its institutions in
such a way that they are able to
absorb the technology from FDI. These technological spillovers can
happen via imitation, employee
training, and the introduction of new processes and products by
foreign firms. Konings (2001) shows
that FDI is important for transferring technology to a host
economy. FDI brings technology, which
translates into higher growth and productivity in the host country
(Borensztein et al., 1998; Xu,
2000). FDI enhances the host economy, adjusts labour allocations
and quality and allows the host
country to take full advantage of the potential of new technology
(Young, 1991). The FDI host
country will gain employee training while operating the new
businesses, which eventually
contributes to the development of human capital. Apart from the
inflow of foreign currency into a
country, foreign expertise can be an important factor in improving
the existing technical processes
in the country, as well as improving productivity and
competitiveness, and the efficiency of
resources. It increases trade flows and creates jobs, which will
reduce unemployment. FDI increases
opportunities for local businesses and eventually promotes
innovation.
.
17
The direct and indirect relationships between FDI and economic
performance have largely been
explored empirically in several studies at both macro and micro
levels. These studies have used data
from developed and developing countries and have been inspired by
theories of the Solow-type
standard neoclassical growth models (Borensztein et al., 1998; Woo,
2009). Interestingly, despite
the proposition of the theories, there is ambiguity in the
literature over the role of FDI in economic
performance. While some studies find positive relationships of FDI
on the economy (Borensztein et
al., 1998; Woo, 2009) others find negative relationships or are
unclear (Aitken and Harrison, 1999;
Alfaro et al., 2004).
Basu et al. (2003) use a panel cointegration framework of 23
developing countries to investigate the
relationships between FDI and economic performance. The authors’
empirical results suggest that
there is a long-term steady-state relationship between FDI and GDP
for a cross-section of countries.
Hsiao and Hsiao (2006) examine the Granger causality relationships
between FDI and economic
performance among eight rapidly developing East and Southeast Asian
economies (China, Korea,
Taiwan, Hong Kong, Singapore, Malaysia, Philippines, and Thailand)
by using panel data from 1986
to 2004. The study finds that the causality results reveal that FDI
has a positive significant
relationships on economic performance directly in the studied host
countries. Campos and Kinoshita
(2002) investigate the benefits of FDI in 25 Central and Eastern
European and former Soviet Union
transition countries between 1990 and 1998 and employ Solow’s
neoclassical model. The authors
find that FDI related positively and significantly with economic
performance as the theory predicts.
Agrawal and Khan (2011) test the relationship of FDI on the
economic performances of both China
and India during the period of 1993-2009 by estimating a
Cobb-Douglas production function
including the following independent variables: FDI, GFCF, labour
force and human capital, and
GDP as a dependent variable. The authors show that a 1% increase in
FDI would result in a 0.07%
increase in GDP in China and a 0.02% increase in the GDP of India.
Li and Liu (2005) identify a
positive significant relationship between FDI and economic
performance based on a panel of data
for both developed and developing countries, using a large
cross-country sample of 84 countries for
the period 1970-1999. Wogbe (2014) states that FDI presents one of
the main bases of external
financing for developing countries. The author uses a cointegration
approach to examine the
relationship between FDI and economic performance, and also points
out that FDI is likely to have
a positive association on the economy since it enhances the
productivity of capital through the
adoption of more reliable technologies, and efficient management
and production practices. Mullen
and Williams (2005) examine the role of FDI in 48 states of the
United States economic performance
over the period 1977 to 1997 by using a model that explicitly
considers the stock of foreign capital.
The authors find that inward FDI plays a strong, vital role in
regional economic activity and that FDI
is likely to significantly affect regional productivity and
economic performance. In contrary, Aitken
Venezuelan firms.
Another strand of the literature has focused on sectoral-level
analyses of FDI inflows. FDI can
benefit different sectors in the hosting economies in different
ways. Alfaro and Charlton (2007)
examine the relationship between FDI and the economic productivity
output using sectoral data from
The Organisation for Economic Co-operation and Development (OECD)
member countries during
1990 to 2001 for 19 sectors and 22 countries. The model uses the
Cobb-Douglas production function
in a log form. The authors note that FDI has a positive
relationship with real estate, oil and chemical,
machinery, construction, and trade and repair, whereas in other
sectors FDI is not statistically
significant. Vu and Noy (2009) find observable differences across
sectors too; they show that FDI
causes crowding-in effects on the real estate, oil and chemical,
machinery and trade and repair
sectors. The relationships on other sectors such as food products,
electricity, gas, water and
construction are not significant. They say that aggregate FDI might
mask differences in the
relationships between FDI on economic performance across individual
sectors. Alfaro (2003)
revisits the FDI and GDP relationship, the empirical analysis uses
47 cross-country sets of data for
the period 1981-1999, and the author suggests that FDI in
manufacturing is positive, while in the
primary sector it is negative and evidence from the service sector
is ambiguous.
A number of studies have examined technological distance by looking
at the role of technological
distance to frontier. Aiming to boost productivity and foster
economic growth is an economic policy
that is context specific and depends on the country’s distance to
the international technological
frontier. Distance to frontier is usually measured by the ratio or
difference between a country’s
productivity measure, which is usually the TFP, and that of the FDI
source country. The Neo-
Schumpeterian growth theory suggests that economics are influenced
by a country’s income gap
with advanced economies that describe the international
technological frontier (Aghion and Howitt,
2008). A larger distance to frontier means that countries can
exploit the technologies from advanced
and developed countries (foreign firms). Furthermore, Aghion et al.
(2005) reveal the benefits when
the industry is far from the frontier, but these gradually reduce
as the distance to frontier is reduced.
Vandenbussche et al. (2006) examine the contribution of human
capital to economy-wide
technological improvements. They show that when labour is skilled
they produce a higher growth
relationship, closer to the technological frontier, taking into
consideration the fact that innovation is
a relatively more skill-intensive activity than imitation. Amable
et al. (2008) show the positive
relationship when the distance to the frontier is higher, and the
magnitude of its relationship is lower
when it is closer to the industry at the frontier. Wu (2010) show
the productivity enhancement when
a country is closer to the world technology frontier. Baltabaev
(2013) investigates whether countries
with larger distances to the technology frontier have greater
potential to benefit from FDI by using
19
panel data for 49 countries over the period 1974-2008 and TFP. The
author finds positive and
statistically significant related from the interaction of the FDI
variable with the distance to the
technological frontier; the results suggest that the countries with
larger technology gaps seemed to
have benefited more from FDI. Findlay (1978) was one of the
inventors of the FDI spillover theory.
The author built a model to examine the relationship between FDI
and technological change in a
backward region, following Gerschenkron (1962). In brief, the
larger the distance to frontier and the
technological gap between the foreign firms and domestic firms, the
larger the spillover effects and
relationships. In addition, the finding is that the larger the
share of foreign firms in backward regions,
the faster the efficiency growth of backward firms. This theory
indicates that larger distances to the
technology of foreign firms are good for host countries. The more a
host country attracts foreign
firms, the more domestic firms benefit from FDI spillover effects.
Sjoholm (1999) finds that a higher
technology distance to frontier is good for domestic firms to
derive high benefits from FDI inflows,
by increasing the value added per employee. On the other hand, Li
and Liu (2005) discover that a
large technology distance to frontier has the opposite relationship
as FDI has a negative significant
sign in the interaction term with the distance to frontier. An
analysis was done to test whether the
relationships between FDI on/and income growth depends on the
technology distance to frontier.
There is existing literature on the relationships between FDI and
economic performance through
technological and knowledge spillover effects. These papers have
been influenced by theories of
spillovers from FDI inflows. According to several authors (Findlay,
1978; Wang and Blomström,
1992), the extent of FDI spillovers will increase with the
technological gap, as it increases the
opportunities for domestic firms in a host country to obtain higher
levels of efficiency through the
imitation of foreign technology.
accumulation, which include physical and human capital. Blomström
and Kokko (1997) reveal that
FDI provides direct and indirect important channels of technology
transfer and knowledge spillovers
to developing countries. Damijan and Knell (2002) study the
international knowledge spillovers and
find that firms in Estonia, which were very open to FDIs, gain
significant direct technology transfer
through FDI. Das (1987) and Wang and Blomström (1992) examine FDI's
technological spillovers
from the domestic firms’ imitation of technological production of
multinational corporations and
find that it is positive and significant. Javorcik (2004) reports
positive spillover effects on Lithuanian
productivity from FDI. Branstetter (2005) examines the spillovers
of technological information
resulting from FDI. The study finds that FDI increases the flow of
knowledge spillovers at the firm
level. Haddad and Harrison (1993) discover that the technological
spillovers appeared strongest in
the high-tech sector and vanished in law tech sectors. Human
capital is an accumulation factor from
FDI, as domestic firms hire workers of FDI firms to transfer the
new technology – labour turnover
20
(Aitken and Harrison, 1999; Fosfuri et al., 2001). In terms of
capital accumulation, this suggests that
the accumulation of capital in the form of FDI generates, directly
and indirectly, substantial spillover
benefits (Ramirez, 2006).
Additionally, some existing scholars provide insight into the
dynamic differential relationship of
technological spillovers; we distributed a number of them on
geographical and sectoral spillover
dimensions. It has been suggested recently that FDI spillovers have
a circumscribed geographical
dimension or, at least, that they decrease with distance (Audretsch
and Feldman, 1996; Audretsch,
1998; Keller, 2002; Madariaga and Poncet, 2007), as channels of
technological diffusion are
reinforced at the regional level (Girma and Wakelin, 2001; Girma,
2005; Torlak, 2004; Jordaan,
2005). Since knowledge may decay with distance, geographical
spillover plays a significant role in
knowledge diffusion and innovation (Wang et al., 2010). Meanwhile,
geographical proximity is
identified as an essential condition for firms or sectors to enjoy
the benefits of externality,
collaboration and interactions for knowledge flows and the transfer
of technology (Boschma, 2005).
Geographical distance determines the costs of technology diffusion;
it is measured by destination
and firm sector. According to Madariaga and Poncet (2007), using
geographical information to study
the relationship of FDI with aggregate data at the city level in
China, they find that the economic
growth of Chinese cities benefits not only from their own FDI
inflows but also from FDI flows to
the neighbouring cities in China. Geographic proximity is an
important element in the process of
knowledge spillover (Audretsch, 1998). For example, the closer a
domestic firm is located to an FDI
firm, the more frequently their employees interact with each other,
as well as the more frequently
labour moves between these domestic and FDI firms. On the other
hand, the probability that
knowledge flows from one firm to another decreases with geographic
distance. High productivity
locations as well as low productivity areas tend to be
geographically clustered, thus creating strong
spatial links or dependence between locations (Anselin,
2001).
In terms of sectoral spillover within and across sectors.
Naturally, FDI’s potential to aggregate
productivity varies across sectors. Several macroeconomic studies
investigate FDI’s relationship
with economic growth and the results vary. These studies do not
distinguish between the different
sectors where FDI is operating and that would hide the
relationships that appear within and across
sectors. Additionally, backward and forward linkages occur when
output from one sector serves as
an input (like building capital) in another sector. These linkages
provide a potential diffusion channel
to sector-specific knowledge through both profitable and beneficial
knowledge transfer, and by
enhancing productivity and efficiency. Aykut and Sayeck (2007)
examine several developing
countries where the sectoral related to the FDI on aggregate
productive economic growth and they
conclude that a high share of agricultural FDI is negative for
economic growth, while a high share
of manufacturing FDI is positive and has a significant relationship
with economic growth. Akinlo
21
(2004) reveals that the relationship between FDI in Nigeria and
sectoral spillover differ depending
on the receiving sector. Recently, a few scholars have focused on
technological relatedness in the
process of sectoral innovation. The basic mechanism is that
technology and know-how will spill
over from one sector to another so that these sectors share
technology and knowledge (Frenken et
al., 2007). Imbriani and Reganati (1999) study empirically the
relationships between FDI and
productivity and focus in particular on productivity spillovers,
using regional and cross-sector data
from Italy. They found that productivity levels are higher in
sectors where multinational companies
have a greater active presence. Furthermore, Görg and Greenaway
(2001, 2004) state that the
availability of FDI and the presence of multinational companies
have a positive relationship on firms
in high-tech sectors. Dimelis and Louri (2001) find positive
evidence of spillover effects by
analysing 4056 domestic and foreign manufacturing firms operating
in Greece in 1997, while Barrios
and Strobl (2002) evaluate productivity spillovers generated from
FDI by using a large panel data
of Spanish manufacturing firms from 1990 to 1998. They find no
convincing evidence for spillovers
in the case of Spain. According to Nunnenkamp (2002), a host
country's incentives may not
essentially work in all sectors. At the same time, FDI spillover
effects are not mandatory but are
more likely to happen in sectors where the productivity gap between
domestic and foreign firms is
not extremely high. Thus, the benefits from FDI spillovers depend
on the host country’s
technological absorptive capacity to increase its desired
productivity. Some studies observe that
spillovers vary across sectors.
Informed by the above literature and in order to achieve our
objectives for examining the
relationships between FDI and economic performance, technological
distance to the frontier and
investigating the geographic and sectoral spillover in the UAE’s
emirates, the structure of this study
is as follows: the next section provides FDI trends, followed by
the conceptual framework. Then,
empirical specification is presented, followed by the empirical
results and conclusion. An appendix
section is provided at the end of this chapter.
2.2 FDI trends
2.2.1 FDI trends in UAE
FDI plays a pivotal role in promoting and supporting the process of
economic transformation, which
can transfer UAE’s economy from one based on oil and natural
resources to a more diversified
knowledge-based economy. FDI inflow can work as a bridge for the
funding gap that might face
UAE as a result of declining oil revenues. Furthermore, it
generates more employment opportunities,
improves the level of income and raises the standard of living in
UAE, where FDI is a major channel
in the transfer of advanced technology.
22
In order to attract FDI, the UAE is working to build a unique
business environment and improve the
investment climate within all the emirates. Additionally, UAE is
trying to reduce and remove any
obstacles or impediments that serious investors can face. According
to the Ease of Doing Business
Report 2016 published by the World Bank, UAE has maintained the
rank of first among Arab
countries for the third year in a row. There is no doubt that the
UAE offers major benefits, which
enables it to attract foreign investors, such as the availability
of financial surpluses, world-class
infrastructure and a competitive business platform.
UAE continues to enhance its position as a preferred global FDI
destination. From Figure 2.1, we
can see that historically, FDI investment steadily increased by
28.5% between 2009 and 2017. There
was, however, a sharp decrease in FDI by 95.9% between 2006 and
2008 due to the global financial
crisis.
17,188
10,210
705
Data source: fDi Intelligence
23
The UAE is seeking to attract more FDI in order to enhance economic
diversification and achieve
its aim of building a knowledge-based economy. The following Figure
2.2 shows the evolution of
FDI into the UAE by economic sector in million USD during the
period of 2006 to 2014. During
this period, a total of 2,707 FDI projects were recorded in the
UAE, equating to a 2% share of global
FDI. These projects in the mentioned period represent a total of
FDI USD 87.37 billion and a total
of 212,175 jobs were created. The volume of FDI in the UAE
increased steadily by 26% from USD
10.2 billion in 2007 to USD 12.9 billion in 2014. During 2014, a
total of 16,377 jobs was created
and 293 projects were created by this FDI, equating to 7.7% and
10.8% of total jobs and projects
respectively. Generally, the real estate sector is the most
attractive sector for FDI in the UAE,
followed by mining and quarrying, accommodation and food services,
and the manufacturing sector.
The fourth largest contributor of GDP in the UAE is the real estate
sector, which accounted for 9.2%
of the total in 2014. The real estate sector has also generated the
highest number of total jobs and
greatest investments with a total of 50,046 jobs and USD 18.50
billion investment, seeing significant
growth during the period from 2006 to 2014.
Data source: fDi Intelligence
Figure 2.3 shows the FDI by year and the top five FDI source
countries. Between 2006 and 2014,
India had the highest total FDI, followed by the United States and
the United Kingdom. This is due
to the historic trade ties that have long existed between these
economies. The presence of an Indian
community in the UAE is now helping to cement growing cultural,
trade and investment relations.
Bilateral trade between India and the UAE amounted to USD 53
billion in 2015; the UAE is India's
third largest trading partner and the 10th largest investor in
India in terms of FDI. Furthermore, the
4,746
Mining and quarrying (includes crude oil and natural gas)
Manufacturing
Accommodation and food services Financial and insurance
Real Estate Other sectors
Figure 2.2: FDI by year and sector in million USD
485
121
24
UAE is the United States’ largest export market in the Middle East
region — a distinction the UAE
has held for ten straight years. During the past decade, bilateral
trade has doubled, exceeding USD
24 billion in 2018. The United States has a USD 14.5 billion trade
surplus with the UAE, the United
States’ fourth largest trade surplus globally. These economic
exchanges support hundreds of
thousands of American jobs and contribute to growth for United
States’ companies. Moreover, the
UAE is the United Kingdom’s 12th largest trading partner, reaching
USD 74 billion in bilateral trade
in 2015. The UAE-United Kingdom business council has agreed an
ambitious target of USD 33
billion of bilateral trade by 2020.
India increased its FDI in the UAE from USD 4.6 billion in 2006 to
USD 7.4 billion in 2014. Indian
companies have emerged as important investors in the free trade
zones1 in UAE such as Jebel Ali
FTZ, Abu Dhabi Industrial City, Sharjah Airport, and Hamariya in
Ras Al Khaima.
Figure 2.4 shows the number of FDI projects by year and source
country in the UAE from 2006 to
2014. By number of projects, out of a total of 76 source countries,
the United States was the top
source country, accounting for almost one-quarter of projects
tracked. The United States was
investing in different sectors; the main investment projects were
centred on administrative and
support services, manufacturing, and the financial and insurance
sector. Project volume in this source
country peaked during 2011, with 91 projects tracked. Moreover,
from the period 2006 to 2014, the
United States generated the highest number of total jobs, most of
these being created in
1 Free Trade zones (also known as free zones) are designed to boost
international business by providing 100%
ownership to expatriates and single window administration
convenience. In UAE, free zones are either attached
to ports or are industry specific
4,637
7,452
1,018
684
642
2,023
787
India United Kingdom United States Kuwait France Other source
countries
250
59
92
66
145
159
221
238
Figure 2.3: FDI by year and source country in million USD
Data source: fDi Intelligence
25
manufacturing, wholesale and retail trade, the repair of motor
vehicles and motorcycles, and the
administrative and support services sector. Some 403 projects, or
14.9% of FDI projects, were
recorded in 2011. This was the year in which the highest numbers of
projects were recorded. During
that year, a total of 21,223 jobs were created and USD 10.1 billion
capital was invested through
these projects, equating to 10% and 11.5% of total jobs and FDI
respectively. This was due to the
actions of the Ministry of Economy in the UAE, which called for a
speeding up of the ratification of
the draft Foreign Investment Law. This law offers foreign investors
similar rights to those extended
to UAE nationals. It also called for clearer regulations governing
foreign investment, especially on
property rights protection, business dispute settlement and
corporate governance.
Data source: fDi Intelligence
2.2.2 FDI trends by emirate
Concerning UAE’s FDI allocations amongst all its emirates, Dubai
accounts for the majority of FDI
projects. Total investment in Dubai resulted in the creation of
139,451 jobs and USD 53.67 billion
FDI between 2006 and 2014.
According to the available data as in Figure 2.5, we notice that
Dubai’s FDI increased rapidly by
23.5% from USD 6.3 billion in 2007 to USD 7.2 billion in 2014. For
the North Emirates, 2014 was
the highest year for FDI, with FDI increasing by 57% from 2006 to
2014, to reach a total amount of
USD 4 billion in 2014. While FDI in Abu Dhabi fluctuated widely
year on year from 2006 to 2014,
and fell by 20% in 2014 compared to 2006, this decline in FDI
activity is due to corporate
restructurings.
23
20
19
30
47
24
21
28
6
23
25
19
29
23
25
20
42
53
76
51
72
53
61
36
18
17
20
26
21
22
19
18
78
69
89
73
91
86
68
53
125
120
14
162
132
143
123
137
138
2006
2007
2008
2009
2010
2011
2012
2013
2014
India
France
Other source countries 4 5 2 8
Figure 2.4: Number of FDI projects by year and source country
26
Concerning the FDI structure and the main sectors receiving FDI by
emirate between 2006 and 2014,
as Figure 2.6 shows, Dubai’s FDI is centralised in the real estate
sector by 25.7%, followed by the
accommodation and food services sector with a contribution of 15%,
then the mining and quarrying
sector with 12.4%. According to FDI capital invested in key sectors
within Abu Dhabi from 2006 to
2014, it is observed that the concentration of FDI was greatest in
the manufacturing sector at 20%,
followed by the real estate sector at 19.5%. This percentage
increased, allowing for the relaxation of
rules regarding foreign ownership. The freeholding of real estate
properties in certain areas of Abu
Dhabi, known as Investment Zones, started in 2005 and the third
largest allocation went to the
mining and quarrying sector, obtaining 16% of total FDI. In the
North Emirates, the mining and
quarrying sector generated the highest value of FDI (USD 5.1
billion), equating to 34.2% of total
FDI for all economic sectors between 2006 and 2014.
13,432
Dubai Abu Dhabi North Emirates
29
21
Figure 2.5: FDI by year and destination emirate in million
USD
Data source: fDi Intelligence
Data source: fDi Intelligence
Figure 2.6: Main sectors represent capital investment FDI between
the period 2006 and 2014
27
Dubai is seen as the major hub and top destination of global FDI
inflows among the UAE's emirates
for a variety of reasons, including: its reputation of economic
openness, investors’ perceptions of
Dubai’s competitive advantage, founded on its safety and security
and the availability of global
infrastructure, and the reputation that has been built over the
years to keep pace with the rapid speed
of its economic development. Other contributing factors include:
the increase in competitiveness
indicators, the conducive business environment and the business
friendly regulatory environment.
The UAE’s government has identified the main economic sectors that
would support the FDI
diversification in the country between the years 2015 and 2021. The
emirate of Dubai has ascertained
its sector-specific needs to attract future FDI in its
manufacturing, construction, real estate, financial
services, and tourism sectors, while the emirate of Abu Dhabi
planned a new diversification strategy
in order to increase FDI inflow and attract new projects into five
main sectors: manufacturing,
construction, tourism, transport and logistics, and financial and
insurance services. With regard to
the FDI strategy for the North Emirates, the UAE’s government is
targeting improvements in FDI
in manufacturing, the environment, transport and logistics,
tourism, and the healthcare sector.
2.3 Conceptual framework
This section presents an overview of the theory that informs the
discussion on the association of FDI
on economic performance. This overview builds on insights from
Neoclassical growth theory and
the connected empirical growth-accounting framework. The existing
literature proposes that the
relationship be decomposed into direct and indirect relations. In
this section, a discussion identifies
the direct and indirect relationships between FDI and economic
growth.
The first benefit of FDI to a host country is the possibility of
bringing additional capital to the host
country. FDI capital is essential for meeting the Sustainable
Development Goals in a host country.
Capital inflows support a host country's economy, and create higher
output and jobs. Increased
demand of labour and a rise in wages are expected to be further
relationships of FDI inflows into
developing economies. This is linked to the hope that the
population in a host country will benefit
from the job opportunities created from FDI inflows, which will
eventually help to increase wages.
More goods are produced in a host country from FDIs, meaning an
increase in overall demand for
labour and higher wages. The goods produced in a host country are
more skill intensive, so demand
for skilled labour in a host economy increases. Furthermore, FDI
inflows target economies with less
skilled labour. A host country with abundant labour would
experience a raise in the demand for
labour, and increase equilibrium wages in a host country. According
to Nunnenkamp (2002), who
empirically analysed FDI inflows across sectors into developing
countries, FDI increases wages in
all worker groups as multinational companies concentrate on
technology-intensive sectors that
28
demand skilled labour. A host country with a skilled labour force
will benefit from FDI inflows by
offering higher wages but with regard to unskilled labour the
outcome is uncertain. Moreover, FDI
can generate an inflow of physical capital and human capital into
the host country (Johnson, 2005).
Pack (1994) states that high rates of FDI inflows into physical and
human capital achieve high
economic growth rates and enhance a host country’s economic
performance. Standard economic
growth theory states that an increase in total investment would
have a positive related with country’s
economic growth. Consequently, an increase in FDI inflows would
lead to an increase in a host
country’s value added and improve and enhance its economic
performance.
The indirect relationship of FDI (spillover effects of FDI) on a
host economy has been widely
debated in the literature. It is a vehicle for the transfer of
technology and knowledge to host
economies. The transfer of technology and know-how is another
potential benefit associated with
the FDI inflows into a host economy (Pavlinek, 2004). FDI is
expected to expand the existing
knowledge in a host economy through labour training and skill
acquisition and diffusion. Indeed,
even without a significant and huge physical capital accumulation
in a host country from FDI
inflows, FDI is expected to promote and advance knowledge
transfers, for example licensing and
agreements, management contracts and joint ventures (De Mello and
Sinclair, 1995).
In general, multinational companies are expected and assumed to
have a high level of technology,
and they are the firms that are primarily expected to carry out
FDIs. These multinational companies
will have more advanced technology than the surrounding firms in
the host economy, which means
that the average level of technology and productivity in the host
country will be higher (Uppenberg
and Reiss, 2004). According to Blomstrom and Kokko (1997), one of
the main reasons that a host
country tries to attract more FDI inflows is the possibility of
technology spillovers.
On the other hand, technology brings productivity spillovers to
firms within the same sector that the
FDI is in, which means that competitors will become more productive
to stay competitive with
foreign and domestic firms in the same sector. Furthermore,
technology brings productivity
spillovers to sectors other than the ones that FDI is in. This
mainly drives a rise in the level of
knowledge of production in a host country's economy in all sectors
(Uppenberg and Reiss, 2004).
According to Knell and Radosevic (2000), FDI inflows improve a host
country's productivity and
affect a host country’s economic growth by increasing the returns
generated in the interaction
between domestic and foreign firms. According to Javorcik (2004),
spillovers from FDI tak